Monthly Archives: September 2013

Future democracy

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Later today I’m speaking at Nesta’s FutureFest about future economic institutions, in what looks to be a terrific session, compered by Mark Stevenson, author of the excellent [amazon_link id=”1846683572″ target=”_blank” ]An Optimist’s Tour of the Future[/amazon_link]. Yesterday I popped in and heard Cambridge political scientist David Runciman give a thought-provoking talk on the future of democracy. I heard him speak on democracy in the 2011 Princeton University Press lecture, and his book [amazon_link id=”0691148686″ target=”_blank” ]The Confidence Trap: A History of Democracy from World War I to the Present[/amazon_link] is out soon.

[amazon_image id=”0691148686″ link=”true” target=”_blank” size=”medium” ]The Confidence Trap: A History of Democracy in Crisis from World War I to the Present[/amazon_image]

The quick summary (based on my tweets of a 15 minute talk) is that political institutions have not kept pace with technological change – indeed, they’ve hardly moved at all in the 25 years of dramatic advance in information and communications technologies. (Indeed, the mismatch between the pace of technological and social change is a commonplace.) However, he continued by saying that technology has in fact become the way political change has happened, to the extent it has. This manifests itself as technocracy – either the Chinese type, run by engineers, or the western type, run by economists and financiers. Technocracy is unsustainable, however. Democracy needs a reboot, by changing its scale of application, to the city level and to the supra-national, continental level.

It sounds intriguing enough to make the book a wanna-read.

David Runciman at FutureFest

 

Low investment – another moan

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A quick update on my previous post bemoaning low investment in the UK economy. Stian Westlake of NESTA asked a good question: one of the books I cited, Keith Smith’s [amazon_link id=”0140225021″ target=”_blank” ]The British Economic Crisis[/amazon_link], was published in 1984. Was this not just ahead of a long upturn in UK productivity growth, one of the stronger productivity performers in the OECD until the 2000s?

He answered his own question with a link to a NIESR growth accounting paper (pdf) concluding that both capital deepening and skills (human capital) deepening made small contributions to the improved productivity performance from the mid-1980s to 2009. The paper concludes: “The majority of the improvement comes from factors affecting the level of technology and the efficiency of factor use.” This in turn was driven by FDI and openness to trade. The impact of FDI on management skills has been confirmed subsequently by John Van Reenen and others.

Stephen King of HSBC, author of [amazon_link id=”0300190522″ target=”_blank” ]When The Money Runs Out[/amazon_link],  pointed me to the chart below indicating the same thing.

Contributions to annual growth

The (uncomfortable) lessons of history

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I’m not going to add to the ink/electrons expended on the UK economic policy proposals emerging from the party conferences so far. Reading about them so far – and with more to come next week no doubt – sent me back to a couple of fascinating books I have on my shelves. One, published in 1958, is [amazon_link id=”B0000CK05Q” target=”_blank” ]British Economic Policy Since the War [/amazon_link]by Andrew Shonfield. The other is a 1984 book with the superb title [amazon_link id=”0140225021″ target=”_blank” ]The British Economic Crisis: Its Past and Future [/amazon_link]by Keith Smith (as if the country had transitioned from having an economy to having a permanent economic crisis – well, it can feel like that).

One of the dispiriting things is how much of the diagnosis seems relevant in successive generations.

Shonfield writes in his concluding chapter:

“The central failure of postwar Britain is inadequate investment. So many of our difficulties flow from this. Because our wealth grows more slowly than the wealth of other countries, our prices rise faster… the balance of payments is like a raw and exposed nerve… It is bad for the spirit of any country to live with so little room for manoeuvre. There is a noticeable meanness of attitude in the British approach to the arts, to public buildings, to almost any kind of cultural activity. … It is a great depressive to live in a constant atmosphere of ‘make do’, to exist in a place where almost any effort to do anything or go anywhere leads you pretty soon into a bottleneck of some kind.”

Obviously very much of its time, but many British readers now would feel a ping of recognition.

[amazon_image id=”B0000CK05Q” link=”true” target=”_blank” size=”medium” ]British economic policy since the war (Penguin specials)[/amazon_image]

Smith, nearly 30 years later, wrote:

“If output, employment and incomes are to grow in Britain, then the problems of low and poorly directed R&D activity and low industrial investment, which are at the core of Britain’s economic decline, must be overcome. … Britain’s manufacturing performance is so poor that consumption increases have not fed through into increased demand for British products, and hence to investment in British industry. Consumption increases have been spent quite disproportionately on imports.”

Which crisis would that be?

As others have pointed out – for example, Stumbling and Mumbling – UK business investment is weak, weak, weak. The balance of payments deficit was equivalent to 3.8% of GDP last year, the biggest gap since 1989.

I’d like to see the policy debate acknowledge the long-term context.

Beware economists bearing PhDs

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A footnote on Joe Studwell’s [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works[/amazon_link]. He writes:

“At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists. Meiji Japan blazed its trail by following the Prussian, and early American, model which rejected the classical economics that began with Adam Smith and David Ricardo. … There was a strong prejudice against the theoretical approach associated with modern economics and in favour of practical problem-solving.”

Studwell goes on to say that at the height of its 1960s triumphs, MITI had just 2 PhD economists (although I’d note that far fewer economists bothered with PhDs in those days). Taiwan’s equivalent bureaucrats were all engineers. The intellectual tradition on which North East Asian industrial policy was based runs from [amazon_link id=”B00ANKL3YY” target=”_blank” ]Alexander Hamilton[/amazon_link] and [amazon_link id=”1596059524″ target=”_blank” ]Friedrich List[/amazon_link] and includes, in the 1960s, Walt Rostow’s influential [amazon_link id=”0521409284″ target=”_blank” ]The Stages of Economic Growth[/amazon_link].

There were other development economists who focused on the specific and the practical rather than the general and theoretical – in their different ways [amazon_link id=”0415312973″ target=”_blank” ]Peter Bauer[/amazon_link] and [amazon_link id=”0815736517″ target=”_blank” ]Albert Hirschman[/amazon_link] – but they were a minority until recently. It’s interesting to see the intellectual tide turning, with the backlash ranging from the emphasis on randomised control trials to Dani Rodrik’s wholly sensible caution in his 2005 paper Why We Learn nothing from regressing economic growth on policies (download pdf from his home page or here). Here Muryat Iyigun ponders the intellectual tyranny of generalisable results when case studies can be so valuable as evidence.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

Learning economic lessons from Asia

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I’ve nearly finished reading Joe Studwell’s excellent book, [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_link]. Both Tyler Cowen and Cardiff Garcia praised it in our recent Alphaville podcast conversation about economics books, so I obviously had to catch up.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

It is indeed worth reading, building on obviously highly detailed knowledge about the countries of East Asia to theorise about the policies that successfully encourage economic development and rising living standards. The book contrasts the development success of the northern economies of East Asia (Japan, South Korea, Taiwan, China) and the southern ones (Thailand, Indonesia, Malaysia, the Philippines). The compare and contrast approach leads Studwell to conclude that successful economic development takes the following path:

1. An initial land reform that breaks up plantation-style estates and redistributes land from  landlords to tenants. Perhaps counter-intuitively, the application of a great deal of family-based labour on small farms has proven a far better footing than greater use of capital equipment at large scale for improving productivity. The evidence is that yields on the small plots of countries that did undertake land reform exceeded yields on large farms. In addition, the increased incomes of largely rural populations are vital for growing the domestic market for manufactures over time. However, land reform is politically difficult – the examples in Asia stemmed from great crisis. The redistribution also needs to be accompanied by a suite of policies to support agriculture, including extension support, rural credit and infrastructure investment.

2. The next stage is to grow domestic manufacturing. Studwell describes this as “protectionism”, whereas I would call what he depicts in the successful economies “industrial policy”. He rehearses the often-made argument that just as European economies and the US relied on tariff barriers to protect their infant industries in the 19th century, so the successful Asian economies built their manufacturing sectors behind protectionist walls in the 20th century. However, what he describes in the country detail is a policy much subtler than the use of trade barriers. Reading the examples, it seemed to me that the key elements were: (i) a willingness to use government funding to support domestic manufacturers until they reached a scale that would make them globally competitive – importantly, testing their competitiveness by making investment or subsidies depend on export volumes; (ii) opening domestic markets to imports of key inputs for exporters even at the expense of other domestic industries – in other words, not protection against imports so much as support including export subsidy for strategic sectors. One example is Japan’s decision to open the market to imported cotton, which did for its own cotton growers.

Now, it is true to say that the free-market philosophy driving economic policy since the 1980s means governments in the UK at least have self-amputated their ability to support manufacturing in this strategic way. Interestingly, Harold Wilson’s famous “White Heat of Technology” speech (link available on the Ballots and Bullets blog), 50 years old this week, reads as exactly the kind of long-term, market-tested intervention Studwell describes. Mariana Mazzucato has recently been beating the drum for a rediscovery of industrial policy with her very interesting book [amazon_link id=”0857282522″ target=”_blank” ]The Entrepreneurial State[/amazon_link]. It seems a no-brainer to me (to use the technical economics jargon). Maybe others hesitate because of the association with protectionism that helps lame-duck industries limp along, the picking of winners which turn out to be losers, but this is not what Studwell describes – and it’s why I think he is wrong to use the term “protection”. Setting aside the issue of the label, we need to (re-)learn this lesson from the Asian success stories.

The book also lacks in this section more analysis of how the policy needs to adapt to the world of extended supply chains of increasingly complex manufactured products. It is much harder for a poor country to find a role in global industries now than it was for Japan to reverse engineer washing machines in the 1960s.

3. The third stage extending the role of financial services, while keeping finance on a short leash. With hindsight, it is clear that the globalisation of the 1990s and 2000s over-liberalised high finance while not bringing necessary ‘low’ finance to billions of people with low incomes and no access to the formal banking and credit sector. Any economist who thought globalisation was a turbulent but broadly good thing (this includes me) surely has to accept that there was too much liberalisation of cross-border portfolio flows, and that emerging economies should keep the ability to control these flows in their policy armoury.

The book ends with a chapter on China that hedges its bets on the country’s prospects, pointing out the obvious institutional and structural challenges ahead. It also left me feeling pretty cautious about the prospects for sustained development in the region’s still-emerging economies such as the Philippines, Indonesia and Thailand – not much political prospect of land reform or reigning in the elites in those countries.

This is definitely one of the best books I’ve read on the region, and on economic development in general. It’s a model of tying together historical knowledge, empirical evidence and analysis. It is also a good complement to Justin Yifu Lin’s [amazon_link id=”0691155895″ target=”_blank” ]The Quest for Prosperity: How Developing Economies Can Take Off[/amazon_link], which sets out a Chinese policy maker’s perspective on the same questions regarding manufacturing.